Let a new federal program help you refinance

The foreclosure prevention program Congress approved last summer got under way Oct. even as the wrangling over President George W. Bush's $700-billion bank bailout continued.

Hope for Homeowners is intended to help homeowners struggling with unaffordable mortgages save their homes.

The program is intended to help 400,000 homeowners refinance into fixed-rate loans with reasonable payments.

That's something borrowers struggling to keep up with rapidly rising payments on their adjustable-rate loans desperately need to do but can't, because they don't have enough equity in their homes.

We would like to believe this will be more successful than Washington's previous efforts to deal with the mortgage crisis, such as the highly publicized interest rate freeze and FHASecure.

They were flops that didn't help nearly as many homeowners as expected.

We have our doubts about the new plan, as well.

The problem is that borrowers won't have the final say on whether to take advantage of the new refinancing program. It will all be up to their lenders.

Hope for Homeowners allows even the most desperate borrowers to apply -- those who are upside down on their loans and owe more than their homes are worth.

But that requires their lenders to accept a significant loss.

Let's say you borrowed the entire purchase price of a $200,000 house a couple of years ago. You still owe $198,000, but property values in your area have declined and your home now is worth $170,000.

That makes it nearly impossible to swing a traditional refinancing, because your collateral (the house) isn't worth as much as you need to borrow to pay off the original loan.

Hope for Homeowners gets around that by having the Federal Housing Administration guarantee the repayment of a new loan. But that comes with a big caveat -- you can't borrow more than 90% of what your home is currently worth.

In our example, the homeowner can borrow just $153,000.

That means the original lender must accept $153,000 as full payment on a $198,000 debt -- a 23% loss -- or haircut, as it's often called in the lending industry.

If the lender doesn't accept the loss, the homeowner can't take advantage of the Hope program and will continue down the road to foreclosure.

Throughout the mortgage crisis, government leaders such as Federal Reserve Chairman Ben Bernanke; U.S. Sen. Chris Dodd, D-Conn., and U.S. Rep. Barney Frank, D-Mass., have urged lenders to accept similar losses by forgiving some of the debt on those high-cost ARMs borrowers can no longer afford.

Lowering the principal on a loan is one of two major ways to lower monthly payments and help homeowners avoid foreclosure. (The other option is to reduce the interest rate.)

But the big hedge funds, banks and mortgage companies that up to now have owned much of that debt have been uniformly, and unrelentingly, unwilling to do so.

They've preferred to foreclose.

We're skeptical that those investors will be willing to change just because the government has a new refinancing program.

Indeed, executives from most of the major mortgage-servicing companies recently told a congressional committee that they aren't too keen on writing down mortgages.

Alan White, an assistant professor of law at Valparaiso University in Indiana, presented research that showed fewer than 2% of mortgage modifications over the past year reduced the borrower's principal.

If lenders won't voluntarily write down loans so borrowers can take part in Hope for Homeowners, Frank threatened to force their cooperation.

But we suspect lenders will only allow borrowers who have some equity in their homes to take part in the program.

They may not have enough equity to qualify for a new loan without government help, but they'll have enough to ensure that their existing loans are fully repaid.

Borrowers who are upside down will remain stuck in their deceptive and costly option ARMs, 2/28 and 3/27 mortgages.

The record number of foreclosures caused by those loans is driving the current mortgage crisis and pushing the economy toward recession.

More than 1.5 million homeowners lost their properties to foreclosure last year -- more than twice the historical average -- and that figure may exceed 2 million in 2008.